Business Cycle Funds
Should
you invest in business cycle funds?
Like the climate,
which has seasonal cycles, the economy also goes through cycles. Business
cycles are a sort of variation that may be seen in the overall economic
activity of a country. A business cycle comprises expansions that occur roughly
simultaneously in many different economic regions and sectors, followed by
similarly widespread contractions (recessions). The series consists of growth followed
by a boom or peak, then recession and troughs (when the economy is in deep
depression).
Although not periodic,
this series of adjustments occur frequently. These changes can be triggered
because of many factors such as inflation, interest rates, government policies,
foreign countries' actions and policies, changes in the demand, and supply of
money, etc.
Different business
cycle phases might appear at various points in time in multiple economies.
Consequently, there may be occasions when a specific business cycle in one
economy offers business chances for other economies.
Now,
what is a business cycle fund?
A business cycle fund
identifies economic trends and invests funds in the sectors likely to
outperform by deploying the business cycle approach of investing. During the
expansion phase, it'll buy stocks of firms that might benefit from the business
cycle or market/sector leaders.
Business cycle funds
invest in various companies irrespective of the same sector, while sector funds
invest only in one sector-specific sector company. For instance, a technology
sector mutual fund will invest only in technology-related companies. In
contrast, a business cycle fund will invest in all those companies that might
be positively impacted at any particular phase of the economy.
What advantages of investing in a business cycle fund?
It is critical to
comprehend that sector performance fluctuates across an economic cycle. For
instance, the financial sector would perform better during the recovery and
boom periods. Still, industries like pharma and FMCG will probably perform
significantly better than other industries during phases like the recessionary
phase. For example, the pharmaceutical and communications industries were
profitable throughout the pandemic even while the economy was in a slump.
A fund manager is
better positioned to decide due to the large research team at his disposal
because not all the companies in a sector would perform well even at the best
of times. Investors can feel secure knowing that their portfolios will be
strong enough to ride through market cycles and take advantage of market
opportunities thanks to this investing strategy.
The scheme's
investment goal is to produce long-term capital appreciation through allocation
between sectors and stocks at various business cycle stages while investing
with an emphasis on riding business cycles.
- It will buy stocks
of industry leaders or businesses that do well when one sector does
well. This will happen during an economic expansion.
- It will invest in businesses
from industries that offer protection against downturns during a
contraction phase.
Business cycles have
gotten shorter, and a portfolio must respond swiftly to shifting conditions.
Risks
involved in a business cycle fund
The significant risk in
investing in business cycle funds is timing. The phases in the business cycle
might change quickly, and in this situation, the fund managers have to consider
the changes and make appropriate investment calls.
Another risk is cyclical
risk. It is the risk of business cycles or other economic cycles adversely
affecting the returns of an investment, an asset class, or an individual
company's profits.
Should
you invest in business cycle funds?
The decision is
subjective, but it is important to keep in mind the returns and risks involved.
You can take calculated risks to exploit the profits offered by the funds.
If you are a new
investor, staying away from thematic funds and investing in diversified equity
funds will be better. To know more, you can contact us.
This blog is purely
for educational purposes and not to be treated as personal advice. Mutual funds
are subject to market risks, read all scheme-related documents carefully.
AMFI Registered Mutual Fund Distributor
6306522855
Burlington, Lucknow, 226001
